In a landmark decision, the Securities and Futures Commission (SFC) of hong kong will begin to accept license applications for the crypto trading platforms currencies from 1 June. This announcement marks a significant step towards a regulatory framework for crypto exchanges in the region. Now, licensed virtual asset providers will be allowed to serve retail investorsprovided that they ensure that they understand the associated risks.
These changes followed an extensive consultation process that involved public comment on the SFC’s initial policy recommendations. The movement emphasizes the strategic intent of Hong Kong navigate a regulatory path through the complex world of crypto currencies.
A conservative approach: Restrictions and capital requirements
However, the authorization given to virtual asset providers comes with a cautious approach. A main provision of the SFC concerns the stablecoins. The latter will not be admitted for retail trading until the proposed regulations for this asset class come into force.
The SFC guidelines also expressly prohibit “gifts” in crypto or airdrops designed to encourage customers to invest. Additionally, the regulation requires cryptocurrency platforms to maintain a minimum capital of 5,000,000 Hong Kong dollars (600,000 euros) at all times. Exchanges are required to submit monthly statements which include the available and required liquid capital of the platform, a summary of bank loans, credit facilities and an analysis of profits and losses.
Investor protection: Rigorous due diligence and review of tokens
Additionally, the SFC has placed immense responsibility on platform operators to perform due diligence. All tokens listed must go through rigorous due diligence procedures, even if they are already listed on another platform. The registration process will also require audits of smart contracts by independent evaluators.
However, the rules give some leeway to platform operators, suggesting that they need not appoint independent external members to token review committees as long as they adequately manage conflicts of interest.
Client Protection Measures: Asset Segregation and Netting
In addition to robust due diligence, the SFC insisted on safeguards for assets virtual customers. These assets should be fully covered by each platform’s compensation regime. In addition, the regulator will allow platforms to segregate client assets through an escrow provision or by reserving funds through the licensed platform.
While there have been suggestions for bringing in third-party custodians to protect client assets, the SFC argued that the lack of a regulatory regime for such custodians could hamper their oversight and enforcement abilities.
With those directives coming into force on June 1Hong Kong is ready to welcome a new era in the regulation of cryptocurrency exchanges, which could serve as a model for other jurisdictions.
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